If you own a property, you aren’t limited to having just one mortgage secured against the bricks and mortar you own. You can take out a second mortgage too, which can come in useful for all sorts of reasons, from funding home improvements to clearing your debts.
But they don’t work exactly like first mortgages, and they aren’t available from quite so many different lenders, so we thought we’d dig into the topic and shed some light on it.
What is a second mortgage?
But really, as far as names go, second mortgage is pretty accurate. It’s the second mortgage that you secure against a single property.
How much you can borrow with a second mortgage comes down to the equity you own in a property. This is the amount that you own mortgage-free. So, let’s say your property is worth £300,000 and you still have £100,000 left on the mortgage. That means you have £200,000 equity in the property. Lovely!
A second mortgage is secured against that equity, rather than the value of your house overall.
How do second mortgages work?
In practice, a second mortgage works in a pretty similar way to a first mortgage really.
You work out how much you want to borrow, and then set a term for that loan. It could be just 5 years or so , or it could run for a few decades ‒ ultimately it’s up to you how long you want to be paying it off for.
You’ll then have to make monthly repayments towards clearing that loan, just as you do with a normal mortgage. And then when you reach the end of that term, the second mortgage is all paid off.
What can I use a second mortgage for?
There are a few different common reasons for wanting a second mortgage. The big one is home improvements. You might want to finally splash out and build that extension you’ve always dreamed of, or treat yourself to a hot tub outside.
(It doesn’t matter if it’s raining as you’re already wet, right?)
If you want to borrow to fund that work, one option is to remortgage your existing home loan. But that can be an expensive move ‒ you could end up having to move to a more costly interest rate for example, or you might have to pay significant exit fees.
Rather than go down the route of fiddling with your existing mortgage, a second mortgage can be taken out just to get the money you need.
Alternatively, some people use second mortgages if they have a bunch of different loans that need paying off.
Keeping track of different balances and repayment dates can be hard work, and makes budgeting tricky. You could instead use a second mortgage to pay off those loans, and consolidate that debt so that you’ve only got one debt balance and repayment date to worry about (beyond your original mortgage, of course).
How much can you borrow with a second mortgage?
There are a few different factors which will influence precisely what size second mortgage you can get your mitts on.
1. You and your borrowing history
With any loan, the lender wants to get an idea of what you are like as a borrower. They don’t want to lose money down the line if you can’t meet your repayments, after all.
So they will dig into your credit history to get a sense of how reliable you are when it comes to paying up on time, as well as precisely how much you can afford to pay each month. After all a second mortgage means a second set of repayments, so you will need to show the lender that you have the cash to spare after your bills are covered.
Well, to be a bit more precise, how much of your home you own outright.
A second mortgage is secured against the equity you own, not the value of the property, and that’s an important distinction.
It means that a borrower who has virtually paid off the mortgage on their home worth £300,000 may be able to borrow more than their friend who has a home worth £1 million but with a massive outstanding mortgage against it.
Different lenders have different loan-to-value limits.In other words, they cap what size loan they are willing to offer against different equity levels. If you’re hoping to borrow more than 75% of the equity you own in your property, for example, then you might find your choices are slimmer than someone who only wants a loan worth 50% of the equity they own.
But they also have all sorts of different rules over what sort of borrowers they will consider, what sort of properties you can borrow against, and the maximum loan size they will offer.
Basically, all lenders are different; one lender might be desperate for your business, while another will turn you down.
That’s why it’s often helpful to speak to a broker. They know what different lenders are looking for and can help you find one that’s likely to offer you the best deal.
How much do second mortgages cost?
The main cost to consider here are the monthly repayments, and they are determined by how much you’re borrowing and the interest rate charged on the loan.
The interest rate can be variable or fixed.
We’re sure you can guess what that means… if your loan has a variable interest rate, it can change at any time. That could mean that rates fall, making your repayments lower. Or they could go up, meaning your repayments increase too. Some second mortgages have fixed interest rates, which mean that for a set period the interest rate is set in stone, so you know exactly what your repayments are going to be.
An important thing to consider here is that not all borrowers get the advertised interest rate. Lenders publish a ‘typical APR’ for their secured loans, but they only have to offer that rate to 66% of successful applicants. So if they have any reason to be the slightest bit wary about you as a borrower, you may get offered a higher rate instead.
Don’t forget the fees
As well as the interest rates, you also need to include fees in your calculations. Lenders can charge fees for all sorts of different reasons. For example, there might be an application fee, which as the name suggests is a charge just for getting the lender to arrange the second mortgage.
As the lender needs to task a surveyor with valuing the property, in order to calculate the equity you own, which may mean there’s a valuation fee too. (Some brokers – like us, hey! – pay your valuation fees for you, giving you one less fee to think about.)
Should you arrange the second mortgage through a broker, there’s probably going to be a broker fee to pay as well, while there may be exit fees to pay if you clear the loan ahead of schedule.
How long do second mortgages last?
Again there’s no simple answer here. The terms that lenders will consider for a second mortgage can be pretty broad, from a couple of years to 30 years, or even longer in some cases.
It really comes down to you as a borrower and how long you need in order to pay off the loan. If your priority is to pay it off as cheaply as possible, then the shorter the term you can manage, the better.
However if you are worried about those monthly repayments then you might want to go for a slightly longer term, as while it will mean the loan costs more overall, you will at least have fewer issues meeting those monthly bills. Plus, most loans allow overpayments, so if you find yourself a little flush, you can pay the loan off quicker and reduce the amount of interest you pay.
How quickly can I get a second mortgage?
Again, this will vary by lender.
But mostly, it’s down to you. The quicker you get them the information they need, review documents and sign all the dotted lines, the quicker the money will land in your account.
Can I get a second mortgage with bad credit?
Second mortgages aren’t restricted to just those borrowers who have an impeccable borrowing record. Even if you have a few issues with your credit history, whether that’s a late payment or a missed one, then you may still be able to find a second mortgage.
However, it may mean that you have fewer lenders to choose from, and that the only deals open to you are a little more expensive.
Representative Loan Example:
Based on borrowing £53,590 over 10 years with 120 monthly repayments of £596.09. Annual Interest Rate 6.04% fixed for 60 months, then variable. Representative APRC 7.9%, total amount repayable £71,625. Includes a broker fee of £2,995 and lender fees of £595.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENT ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.